SIPC in action

There has been confusion over what exactly SIPC protects, so it is instructive to actually see it in action. I cannot personally ever recall seeing it in use, but this week we did see it with the bankruptcy of Lehman Brothers. From an Associated Press article entitled "Judge says Lehman can sell units to Barclays":

The Securities Investor Protection Corporation liquidated Lehman accounts on Friday under a bankruptcy-style process to transfer assets from 639,000 Lehman customer accounts -- about 130,000 of which are owned by individual investors -- to Barclays accounts.

That is half of what SIPC does, simply guaranteeing that the contents of your brokerage account is literally moved from the bankrupt broker to another (solvent) brokerage firm. Although the article says "liquidated Lehman accounts", I think that is a mistake or misnomer. Maybe from a bankruptcy court perspective the accounts were "liquidated" in the sense of any claim against assets of Lehman were eliminated, but I am reasonably certain that this so-called "liquidation" keeps all security positions intact and does not mean that stocks and bonds were sold.

In short, if you had an account at Lehman you now have an account at Barclays that has all of the same assets.

The other half of what SIPC does relates to replacing your assets if your broker absconded with them.

But in neither case does SIPC insure the market value of your assets. Unlike with FDIC insurance, SIPC would only protect the number of shares but not the value of each share. For example, SIPC is not invloved with the "breaking the buck" for the Reserve Primary Fund. People with money in the Reserve Primary Funds still retain ownsership of the same number of shares, even if the NAV of those shares has declined and redemption has been delayed.

You can read the official press release on Lehman from SIPC.

And read the official How SIPC Protects You brochure.

-- Jack Krupansky